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STARTING AND OPERATING A BUSINESS IN VERMONT Copyright © 2007, Michael D. Jenkins
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Vermont has a fairly typical tax and legal structure under which businesses must operate, not significantly unlike most other states. However, since there is essentially no county government in Vermont, towns and cities generally assume the administrative responsibilities that are fulfilled by counties in most other states, such as property tax assessment and collection. Like most states, Vermont imposes an income tax on both individuals and corporations, a sales and use tax, and various excise taxes, but property taxes are imposed at the town or city level, rather than at the county level, and the state also imposes ad valorem property taxes, unlike most other state governments. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Vermont in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. At present, the state's economy is fairly robust, in terms of the level of unemployment and other economic measures. For example, in September, 2007, the state's unemployment rate was only 4.2%, though up somewhat from a 3.7% rate a year earlier. This still compares favorably to the national unemployment rate of 4.7% for the same month. To view the latest federal Bureau of Labor Statistics unemployment rate data for Vermont or any other state, visit the BLS website. UPDATE NOTE: II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Vermont can do so as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Vermont also provides for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships can be formed in Vermont with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or towns in which you operate and, in some cases, state licenses, as well. In addition, if you have any employees, you will have to register as an employer for Vermont income tax withholding and unemployment tax on employee wages, as discussed in Section V. Also, if you sell any kind of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the Vermont income tax law. Instead, your business income from the sole proprietorship is included on the Vermont income tax return, which bases taxable income on federal taxable income, with certain adjustments. Thus, the income you report from your business on Schedule C on your federal Form 1040 will indirectly be taxed by Vermont as well. However, note that Vermont does not allow certain rapid depreciation deductions that were enacted in federal tax legislation in recent years. See Section IV(c) for information on the Vermont income tax and filing requirements for individuals. Doing business as a sole proprietor in Vermont is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, nor obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), it will be required to register the name with the secretary of state, as discussed in Section IV(g). (c) Partnerships. Vermont's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). As is discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. In addition, any partnership or other business that has employees will generally have to register for, and pay, state unemployment tax on wages paid, as discussed in Section V(b), and register for employer withholding tax and withhold income tax from employees' wages. Partnerships, as entities, are not generally subject to state income tax in Vermont, but the income or losses of a partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners. Nevertheless, partnerships or LLC's that treated as partnerships must pay an annual $250 minimum tax, plus pay over withholding tax on any Vermont-source income that is allocable to nonresident partners or members. Partnerships are required to file an annual tax information return with the state, generally, if they have one or more resident partners or Vermont-source income. For more on Vermont partnership tax requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Vermont can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. A general partnership may, though it is not required to do so, file a partnership Statement of Authority with the Vermont Secretary of State, stating which partners in the partnership have the authority to execute instruments that transfer ownership of real estate held in the name of the partnership and specifying any authority or limitations on partners authorized to execute such instruments or perform various other acts on behalf of the partnership. There is a $50 fee for filing a Statement of Authority, which will be canceled after 5 years if not renewed. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Vermont law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the Vermont secretary of state's office, together with a filing fee of $50. Foreign limited partnerships must also register before being allowed to do business in Vermont, and must pay a registration fee of $50. For information on limited partnership filing requirements, see the contact information for the offices of the Vermont Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of Vermont. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Vermont state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Partners in a general partnership can obtain a significant degree of limited liability by simply registering the partnership with the state as an LLP. Vermont's LLP law gives somewhat broader protection to partners in an LLP than is granted under state LLP laws in many other states. To form an LLP in Vermont, you must register with and pay a filing fee of $75 to the secretary of state along with a Statement of Qualification. Foreign LLP's, those created under the laws of another state, must also register with the secretary of state and pay a fee of $100. Every LLP doing business in Vermont, including both domestic and foreign LLP's, must file an annual report with the secretary of state and pay a filing fee of $15 for domestic LLP's, or $100 for foreign LLP's. An annual report must be filed between January 1 and April 1 of each year following the calendar year in which a partnership files a statement of qualification or a foreign partnership becomes authorized to transact business in the state. For more information on LLP registration and reporting requirements, see the contact information for the offices of the Vermont Secretary of State, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides Vermont, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some states, like California, Nevada, and New York, only recognize certain types of professional partnerships as LLP's. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in Vermont, you must file articles of incorporation with the Vermont Secretary of State and pay a filing fee of $75. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct its business in Vermont, by filing an application for a certificate of authority and paying a filing fee of $100. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Vermont, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports and a filing fee of $25, with the secretary of state each year. Foreign corporations must also file annual reports, and pay a $150 annual filing fee. The reports are due within 2 1/2 months after the end of the domestic or foreign corporation's fiscal year-end. Failure to file an annual report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in Vermont must also file corporate income tax returns with the state. See Section IV(c) for a discussion of Vermont corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income taxes in Vermont, see the contact information for the offices of the Vermont Department of Taxes, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Vermont recognizes S corporations for income tax purposes, and taxes them in a manner similar to the federal tax treatment, generally, except that they must pay tax on the Vermont-source income allocable or distributed to nonresident shareholders and are also subject to an annual $250 minimum tax. (f) Limited Liability Companies. Vermont, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Vermont may also choose to operate in the form of an LLC. In most states, including Vermont, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes (or are "disregarded entities" if they have a single owner). See Section IV(c) for a discussion of the income tax treatment of LLC's under Vermont tax laws. To form an LLC under the laws of Vermont, one or more persons must file articles of organization with the secretary of state, which must be accompanied by a filing fee of $75. Vermont state law allows formation of one-owner LLC's, which now qualify for treatment as sole proprietorships for federal tax purposes. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in Vermont, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $100. In addition to initial filing fees, an LLC formed in Vermont must subsequently file annual reports and pay an annual report filing fee of $20 with each such annual report. A foreign LLC is also required to file an annual report and pay the applicable annual filing fee of $100. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Vermont is one of the business-friendly states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Vermont. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Vermont, a purchaser may be held liable for any outstanding unemployment tax liability of the seller unless the purchaser obtains a certificate of no indebtedness from the seller. Such a certificate must be requested by the seller from the Vermont Department of Labor at least 10 days prior to the date of sale. You should obtain a tax release from the Department of Taxes for sales and use taxes. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. In Vermont, if you acquire all of the seller's business, you are a "full successor" and succeed to the seller's experience rating for that group of employees, generally. If you acquire only part of a business, (not "substantially all" of its assets) you are considered to be a "partial successor" and do not qualify for a rate transfer, but must instead use a new employer rate for the acquired operations. PLANNING POINT: EXAMPLE: (e) Withholding Tax on Real Estate Purchases. If you acquire Vermont real estate from a nonresident, except in certain foreclosure transactions, you must withhold Vermont state income tax equal to 2.5% of the consideration paid for the property and remit the withheld tax to the Vermont Department of Taxes within 30 days, or you will be liable for the tax you failed to withhold. To protect yourself from such state tax liability, you need to obtain one of the following certificates:
Also, if you buy land that is located in Vermont, you need to be aware that the Vermont Land Gains Tax applies to most land that has been held by ANY seller for less than 6 years (with certain limited exemptions, such as for land used for a personal residence). While this tax applies to the seller, you (as buyer) are liable if you fail to withhold tax, equal to 10% of the total consideration paid, from the purchase price. You must then immediately file the Vermont Land Gains Withholding Tax Return (Form LG-1) and remit the tax. The seller is required to file Form LG-2 within 30 days after the sale or exchange and remit the balance of the tax due, if any, with the LG-2. IMPORTANT NOTE: The Land Gains Tax can range from as low as 5% (where the property was held for between 5 and 6 years and the seller's percentage gain is less than 100%), to as high as 80% on the gain realized by the seller upon sale or exchange of the property (where the property was held less than 4 months and a gain of more than 200% was realized). In general, the tax rate is higher to the extent your percentage gain is higher, and the tax rate also rises to the extent the period the property was held is shorter. The Land Gains Tax rates are as follows:
The percentage gain is the taxable gain (as computed for federal tax purposes, generally) as a percentage of the property's adjusted tax basis. EXAMPLE: IV. VERMONT TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General. Vermont has tax rates that are generally quite high, as do most New England states, with a top corporate tax rate that was 9.75% in 2005 (but is reduced in 2006 and 2007), and a personal income tax top rate of 9.5%, one of the highest personal income tax rates of any state. Also, as noted in Section III(e), Vermont also imposes a unique Land Gains Tax on sales of realty, at tax rates of up to 80% of the realized gain. However, unlike many states, Vermont has no corporate franchise tax on capital, except for banking corporations, and it imposes no property tax on intangible personal property. Also, Vermont's top corporate tax rate was reduced to 8.9% in 2006 and drops further to 8.5% in 2007. (b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or hall and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. State governments have traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Vermont has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. For help with state licensing and business registration requirements in Vermont, see the contact information for the Office of Professional Regulation of the Vermont Secretary of State, listed in Section VI(a), or contact the Department of Taxes, whose address is also listed in Section VI(a), about registering your business for state taxes and withholding. Most businesses in Vermont will need to register with the Department of Taxes by filing Form S-1, Application for Vermont Business Tax Account. This form will serve as your registration as a vendor for Vermont sales and use tax purposes, meals and rooms tax, and local option (sales and use) taxes, and, if you have employees, will serve as your registration for employer withholding. This can also serve as the registration for corporate income tax or business entity (partnership or LLC) tax filing. If you have employees and pay more than a minimal amount of wages, you will also have to register separately for state unemployment tax with the Vermont Department of Labor, as discussed in Section V(b). (c) Income and Franchise Taxes. Vermont has both an individual income tax and a corporate income tax, as well as fairly typical sales and use taxes and real and personal property taxes. The state also imposes a unique "Land Gains Tax" (see Section III(e)) at tax rates as high as 80% on some sales of land at a profit, where the land was owned for only a brief period and sold for a large gain, a tax apparently designed to discourage short-term speculation in land investments, or "flipping." TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS The Vermont personal income tax, which previously was simply 24% of the federal tax liability, was decoupled from the federal income tax in 2002, when major federal tax cuts went into effect, which would have significantly reduced Vermont's state income tax revenues. Under the new tax system, Vermont's income tax is based on federal taxable income, with certain adjustments, such as for tax-exempt interest from states other than Vermont (exempt for federal tax purposes, but taxable in Vermont), interest on U.S. Treasury obligations (taxable for federal purposes, exempt for Vermont tax purposes), and federal bonus depreciation deductions, which are not allowed by Vermont. Vermont taxes only 60% of any net capital gain income, as computed for federal tax purposes (40% where reinvested in certain venture capital investments within 2 years). The Vermont individual income tax is imposed at graduated tax rates, up to a maximum of 9.5% on taxable income over $349,700 in 2007, for single, joint, or head of household filing status. Tax brackets are indexed and adjusted annually for inflation. Individual taxpayers who are business owners thus generally pay state income tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership, S corporation, or LLC. The Vermont personal income tax return is Form IN-111, which must be filed with the Department of Taxes. Partnerships, or entities taxable as partnerships, such as LLC's, are not subject to state income taxation in Vermont, but must file an information return with the Department of Taxes each year, showing each partner's share of taxable income, losses, and credits, on Form BI-471, if the partnership has one or more resident partners, or has Vermont-source taxable income. However, a partnership (or LLC taxable as a partnership) must pay a $250 minimum tax. A partnership must also withhold tax on behalf of nonresident partners, applying the second-lowest tax bracket rate to the partner's share of the Vermont-source income of the entity (rather than using the highest state tax rate, as was the case before January 1, 2006). The tax payment on behalf of nonresidents by the partnership is treated as a payment of estimated income tax by such partners. The partnership or other pass-through entity that is required to withhold tax on behalf of nonresident owners must make quarterly estimated withholding tax payments, plus a fifth "catch-up" payment after the end of the year, if needed. Such quarterly withholding may be based on the amount required to be withheld for the nonresident in the prior year, as a "safe harbor." The partnership information return is due by April 15th of the following year, in the case of a calendar year partnership. A single-owner LLC that is treated as a disregarded entity for federal tax purposes (that is, as a sole proprietorship, if owned by an individual) is treated the same for Vermont tax purposes, and thus is not subject to the $250 minimum tax that applies to LLC's that are treated as corporations for tax purposes. Individual taxpayers doing business as sole proprietors (or who are partners in partnerships, members of LLC's, or shareholders in S corporations), who have taxable income from the business, will generally be required to make advance payments of estimated Vermont individual income taxes, on Form IN-114, if their net tax liability (not covered by withholding) exceeds $500 for the taxable year. Estimated tax payments are due in four installments, on the 15th day of the 4th, 6th, and 9th months of the taxable year, and the 15th day of the first month of the following year. To avoid penalties for underpayment of estimated tax, you must either pay in 90% of the current year's tax, or 100% of the previous year's tax (if the previous year was a taxable year of 12 months and the taxpayer filed a tax return). The Vermont corporate income tax rate, on corporations
other than S corporations, is imposed at graduated tax
rates, as follows:
There is a minimum corporation income tax of $250 each taxable year ($75 for certain small farm corporations). The state corporation income tax return is Form CO-411, which must be filed with the Department of Taxes by the 15th day of the third month following the end of the taxable year, or by March 15th in the case of a corporation whose taxable year is the calendar year. Corporations are required to make estimated tax payments of their state corporate income tax in advance, if their tax liability for the year equals or exceeds $500. Estimated tax payments are due in advance, in four equal installments, on the 15th day of the 4th, 6th, 9th, and 12th months of the taxable year. Fewer installments are required if the $500 declaration threshold is met later in the year, after the 15th day of the fourth month of your taxable year. Corporations file their estimated tax payments on Form CO-414. The total estimated tax that must be paid in is usually equal to 80% of the actual tax liability for the year. However, if the preceding year was a full year of 12 months, the current year payments need only to be equal to an amount equal to a tax based on current year tax rates as applied to the taxable income of the prior year, if less. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. S corporations are generally exempt from tax in Vermont, except to the extent they have income allocable or distributed to nonresident shareholders. However, S corporations must pay an annual $250 minimum tax, regardless of their income. Also, like other pass-through entities, S corporations with nonresident owners (shareholders) must withhold Vermont income tax on their share of the S corporations Vermont-source taxable income. An S corporation may elect to file a composite Vermont tax return on behalf of its nonresident shareholders who have no other Vermont-source income, which will relieve them of the obligation of filing a Vermont nonresident individual tax return. TAXATION OF LIMITED LIABILITY COMPANIES In Vermont, a limited liability company (LLC) is taxed in the same manner as a partnership, thus avoiding the possible double taxation of income that can occur with a corporation. Note that under revised IRS regulations, effective since 1997, an LLC may now elect to be treated as a partnership if it has more than one owner, or as a sole proprietorship if it does not, for federal income tax purposes. Vermont's LLC law now recognizes the validity of a one-owner LLC. Thus, a one-owner LLC that is a "disregarded entity" for federal tax purposes is also disregarded for Vermont tax purposes. Note that it is not always entirely clear whether an LLC is a "single-member LLC" or not, where the "single owner" is a married couple who hold the entire ownership of the LLC in some form of co-tenancy, such as joint tenants with right of survivorship, tenants by the entirety, or as tenants in common. The federal Internal Revenue Service (IRS) has taken a very lenient position in Rev. Proc. 2002-69, where a couple hold the LLC interest as community property, ruling that the IRS will accept whatever choice the couple make, either to disregard the LLC as an entity (treating it as a "single-member LLC") or to treat it as a partnership between the husband and wife. However, Vermont is not a community property state, so where the LLC is owned by a husband and wife in some form of co-tenancy, it is unclear whether the IRS treatment would be as lenient as for community property owners, since the IRS has not issued any published rulings on whether an LLC can be a disregarded entity if held in one of the various forms of co-tenancy by a married couple, rather than being held as community property. Thus, it is also unclear, where an LLC is owned by a husband and wife as co-tenants, whether Vermont would treat the LLC as a single-member LLC or as a partnership. UPDATE NOTE: Any LLC that is taxable as a partnership is subject to the same $250 Vermont minimum tax that applies to all partnerships. However, as noted above, a single-member LLC that is treated as a "disregarded entity" (sole proprietorship) for federal tax purposes is treated in the same manner for Vermont tax purposes, and is also exempt from the $250 annual minimum tax. Like other pass-through entities, an LLC with non-resident members may be required to withhold and pay over Vermont income taxes on behalf of such nonresident members, on their share of the LLC's Vermont-source income. A composite return may be filed on behalf of members who have no other income from Vermont sources, which will relieve them of the obligation of filing a Vermont nonresident individual income tax return. (d) Sales and Use Tax. Vermont imposes a general sales tax on retail sales of tangible personal property and on certain types of services at the statewide rate of 6%. In addition, local governments are allowed to adopt local sales taxes, at varying tax rates of up to 1%. Sellers are required to obtain a seller's permit and to collect and pay over the state and local sales and use taxes to the Department of Taxes. In addition to the sales tax, the state imposes a 9% meals and rooms tax (10% on alcoholic beverages served in restaurants), and localities may adopt a local meals and rooms tax of up to 1%. UPDATE NOTE: There are numerous other exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within Vermont. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Before making any taxable sales, you will need to register with the Vermont Department of Taxes on Form S-1, Vermont Application for Business Tax Account. This form will also serve as your registration as an employer for state income tax withholding on wages, if you have any employees, and meals and room tax. For more information on Vermont sales and use tax registration and compliance, see contact information for the offices of the Department of Taxes in Section VI(a). (e) Real and Personal Property Taxes. In Vermont, as in every other state, any business real estate you own will be subject to real property taxes. In Vermont, there are no county taxes, as there is essentially no county government role in the state. Unlike most states, since 1997 the state government has also imposed property taxes, under the Equal Educational Opportunity Act of 1997 (generally known as Act 60). This tax is generally referred to as the education property tax. Vermont localities impose personal property taxes on tangible personal property, including business inventories. ("Personal property" is any kind of property that is not real estate.) However, towns are given the option of exempting business inventories or certain manufacturing machinery from the personal property tax. Businesses are required to file inventories (lists) of real and personal property they own with town listers each year by April 20th. While Vermont generally taxes tangible personal property, it does not impose a property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets. Vermont also imposes a Land Gains Tax on certain transfers of real estate located in the state, which is in addition to income tax on such gains. See Section III(e) for more detailed information on the Vermont Land Gains Tax. (f) Other Business Taxes. Vermont imposes a number of excise and other taxes on businesses, some of which may affect you. These include:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. Vermont requires that any individual or partnership that does business in the state under an assumed business name register the name with the secretary of state and pay a fee of $40. An assumed name registration is good for five years, after which it must be re-registered, with a re-registration fee of $40. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Vermont imposes a state income tax on the income of individuals, you will need to also withhold Vermont income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Department of Taxes by filing Form S-1, Application for Vermont Business Tax Account. This form will also serve as your registration as a vendor for Vermont sales and use tax purposes, meals and rooms tax, and local option (sales and use) taxes. However, if you have employees and pay more than a minimal amount of wages, you will also have to register separately for state unemployment tax with the Vermont Department of Labor, as discussed in Section V(b). For more information on Vermont income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Taxes, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in any calendar quarter, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Vermont unemployment tax are required to register with the Vermont Department of Labor on Form C-1, Status Report. New employers are generally required to pay tax at a rate that has been 1%, beginning July 1, 2004 and in each subsequent fiscal year since then, on the first $8,000 of wages paid to each employee each fiscal year. Different, generally higher new employer rates apply to certain out-of-state corporations engaged in construction industry businesses in Vermont. After you have had employees for approximately 2 1/2 years, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. Tax rates will also vary, depending on your firm's industry classification. All state unemployment taxes are imposed upon you as the employer, and, under Vermont law, cannot be charged to your employees or withheld from their wages. For more information on your Vermont unemployment tax obligations as an employer, see the contact information for the offices of the Vermont Department of Labor, listed in Section VI(a). (c) Workers' Compensation and Other Mandated Employee Insurance Coverage. Vermont law requires almost all private employers to provide workers' compensation insurance or provide self-insured coverage and, beginning in 2007, also requires all but certain small employers to either provide employees with health insurance or else pay health care insurance premiums into the state's Catamount Health Plan, which is described below in this section. (1) Workers' Compensation Law. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Vermont, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is not generally considered an employee. A licensed real estate agent or broker is considered to be an independent contractor, and is not required to be covered by workers' compensation. In each case, however, the sole proprietor or real estate agent or broker must have a written agreement or contract with the business to whom services are provided, stating that the person is an independent contractor and including other required provisions. Corporate officers are considered to be employees and must generally be covered by workers' compensation, but such officers may elect not to be covered under the workers' compensation law. Up to 4 corporate officers or 4 LLC managers or members may be excluded from workers' compensation coverage. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the Vermont workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Workers' Compensation Division of the Vermont Department of Labor, listed in Section VI(a). (2) Catamount Health Plan (Mandatory Employee Health Insurance). In 2006, Vermont enacted a universal (or almost universal) health care plan. Under this plan, the state provides a new voluntary, standardized health plan -- Catamount Health -- for uninsured residents of Vermont. Participants in the plan will pay low premiums, subsidized in large part by the state for low-income individuals with incomes below 300% of the federal poverty level, and all enrollees will incur some costs, such as $10 for office visits or 20% co-payment for medical services, up to certain caps. Provision is also made for subsidizing employees who participate in their employer's health insurance plan, rather than in the state's Catamount Health plan. Under the new law, employers are not required to provide health coverage for their employees, but employers with more than 8 employees who do not provide health insurance coverage will be required to help fund Catamount Health by paying a dollar a day ($365 a year) for each of their uninsured workers. Employers may exempt up to 8 full-time employees from coverage without paying the daily fee for them in fiscal years 2007 and 2008, 6 employees in fiscal 2009, and 4 employees in fiscal year 2010 and thereafter. A calculation of full-time employees ("full-time equivalent") must be made, expressed as the total number of employee hours worked in a calendar quarter, divided by 520. Employers required to make contributions under the Catamount Health Plan must do so when filing quarterly unemployment tax returns, by attaching a Form HC-1 to their Form C-101 unemployment contribution report. The Catamount Health plan went into effect on October 1, 2007, but employers required to contribute for uninsured employees owed contributions beginning on April 1, 2007 (the first payments were due at the end of that quarter, ending June 30th, 2007). For more information on employer responsibilities under the Catamount Health Plan, contact the Vermont Department of Labor, at the address listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, if, for example, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Vermont wage-hour laws, which provide for a state minimum hourly wage that was increased to $7.00 an hour on January 1, 2005 and will be the same as the federal minimum in the future if the federal wage is raised to a level higher than the Vermont rate. The minimum wage increased to $7.25 an hour on January 1, 2006, and increases each January by the lesser of 5% or the increase in the Consumer Price Index, CPI-U, U.S. City average. The Vermont minimum wage rate increased to $7.53 an hour on January 1, 2007. The Vermont minimum wage law applies to any employer of two or more employees. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the Vermont wage-hour rules, as well as outside salespersons and taxi-cab drivers. State law in Vermont, like the federal, generally requires the payment of overtime pay at the rate of time-and-one-half for hours worked in excess of 40 hours a week, although there are a number of exceptions to the state overtime law, including a broad exemption for retail sales or service establishments, which make at least 75% of their sales at retail, rather than for resale, plus exemptions for hotel, motel or restaurant establishments. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Wage and Hour Division of the Vermont Department of Labor. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Vermont, and must post a child labor poster in the workplace. Vermont generally conformed its child labor laws in 2003 to the federal child labor standards, although some differences remain. The Vermont child labor rules for non-agricultural employment can be briefly summarized as follows:
For more information on Vermont's minimum wage, overtime, and child labor laws, contact the Vermont Department of Labor, at the address listed in Section VI(a). (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Vermont is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and Vermont job safety requirements, you may wish to contact the Vermont Department of Labor and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. Employers are required to obtain and display the Vermont Occupational Safety and Health Act (VOSHA) poster, Safety and Health Protection on the Job, in the workplace. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Montpelier offices of the Department of Labor, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Vermont labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. Employers in Vermont are required to pay wages on a weekly basis, or, if written notice is given to the employees, pay on a biweekly or semi-monthly basis. An employee who voluntarily leaves his employment must be paid all outstanding wages on the last regular pay day, or if there is no regular pay day, on the following Friday. An employee who is discharged from employment must be paid within 72 hours of discharge. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Vermont does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Vermont, and display a poster informing employees of their rights. You can obtain this poster from the Montpelier office of the Vermont Human Rights Commission, at the address listed in Section VI(a). Vermont state laws prohibit discrimination in employment on the basis of race, color, religion, national origin, gender, sexual orientation, gender identity, ancestry, place of birth, age, marital status, or physical or mental condition. Unlike the federal civil rights laws, the Vermont employment discrimination laws do not contain exemptions for small employers. (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the Vermont Department of Labor for Vermont employers) within 20 days after the date of hire. Employers who file reports electronically must file twice each month (if needed), on dates not more than 16 days nor less than 12 days apart. See Sections VI(a) and VI(c) for information on where to file new hire reports by mail, fax, or on the Internet. (5) Vermont Family Leave and Parental Leave Laws. In addition to compliance with the federal Family and Medical Leave Act, which applies only to employers with 50 or more employees at least 20 weeks of the year, Vermont has enacted Family Leave and Parental Leave Laws that you must comply with, which apply to many smaller employers. The Vermont Parental Leave Law covers employers with 10 or more employees who work an average of 30 hours per week over the course of a year. The Vermont Family Leave Law, which includes Short-Term Family Leave, covers employers with 15 or more employees who work an average of 30 hours per week over the course of a year. An employee who has worked for a covered employer for an average of 30 hours a week for a year is entitled to leave under these laws. During any 12 month period, the employee is entitled to up to 12 weeks of unpaid leave, as follows:
In addition, an employee is entitled to short-term family leave (unpaid) of up to 4 hours in any 30 day period (but not more than 24 hours in any 12 month period), to participate in a child's pre-school or school activities or to be present during a dependent's routine medical or dental appointments, medical emergencies, and other specified activities. During the leave, at the employee's option, an employee may use accrued sick leave or vacation leave or any other accrued paid leave, not to exceed six weeks. Utilization of accrued paid leave does not extend the leave provided under these laws. The employer must continue employment benefits for the duration of the leave at the level and under the conditions coverage would be provided if the employee continued in employment for the duration of the leave. An employer may require that the employee contribute to the cost of the benefits during the leave at the existing rate of employee contribution. When the employee returns from leave, he or she must be offered the same or a comparable job at the same level of compensation, benefits and seniority that existed at the time the leave began, generally. IMPORTANT NOTE: As an employer, you must display the state family and parental leave poster in your workplace. Copies of this poster can be obtained from the Vermont Department of Labor. (6) Lie Detector Tests Prohibited. Under Vermont's labor laws, employers may not use polygraph (lie detector) tests as a condition of employment or to deny promotions, and may not penalize an employee or job applicant for refusal to take such a test. A limited exception is allowed for certain wholesalers or retailers of precious metals or gems and a similar exception applies to manufacturers, wholesalers, or retailers of regulated drugs (but only those employees who come in contact with such drugs may be given polygraph tests). Employers who are authorized under federal laws or regulations to administer such tests to employees are also allowed to do so under the Vermont law. (7) Employment of illegal aliens. Vermont law, since 1977, has made it illegal to employ any alien individual who does not possess the required work authorization under federal law. Knowing and willful violation of this law may subject an employer to a fine of up to $300 for a first offense or up to $750 for any subsequent offense. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Unlike most other states, Vermont does not have a single agency to whom you can go to handle all your licensing and permitting requirements for your business under the laws of Vermont. Accordingly, you will need to contact the various Vermont government agencies that are mentioned in this book or listed below on an individual basis, to obtain needed forms, official posters, information, and other assistance from each such agency. A list of addresses and other contact information for such key agencies is set forth below for your convenience. BUSINESS STARTUP INFORMATION. A key agency that can provide helpful information on getting your business up and running in Vermont is: Vermont Department of Economic Development SECRETARY OF STATE. Contact the office of the secretary of state for information on:
Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Vermont Department of Taxes, which is the main tax collection agency in Vermont. Also, you can register with this agency as an employer, for state income tax withholding purposes, on Form S-1, Vermont Application for Business Tax Account. Vermont Department of Taxes STATE LABOR LAWS. The Vermont Department of Labor was recently formed (July 1, 2005) to take over the functions of the former Department of Labor and Industry and the Department of Employment and Training. Contact this agency about your obligations as an employer under various state labor laws, including:
Vermont Department of Labor STATE LICENSES. The Office of Professional Regulation is the main Vermont licensing agency for professional licenses, and is part of the Vermont Secretary of State's office. Contact the Secretary of State at the address listed above for that agency. STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Vermont sales and use tax law, from the Department of Taxes, at the address listed above for that agency. STATE UNEMPLOYMENT TAX. Contact the Vermont Department of Labor, Division of Unemployment Insurance and Wages, to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject, at the address listed above for that agency. NEW HIRE REPORTING. Employers must report all newly hired employees within 20 days to the Vermont Department of Labor, at the following address (or by fax or the Internet): Vermont Department of Labor See the website address for reporting new hires on-line, in Section VI(c). WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the Vermont Department of Labor, at the address listed above for that agency, for further information. STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in Vermont, contact the Vermont Department of Labor, at the address listed above for that agency. STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on Vermont civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace: Vermont Human Rights Commission (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Vermont to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. Vermont Small Business Development Center (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Vermont state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Vermont. Since new sites are appearing frequently, you might also want to search for other Vermont government Web sites by using one of the popular Internet search engines, such as Google, Excite! or Yahoo. To start your Internet search for Vermont government information, you may want to begin with the following Internet sites: State of Vermont Home page: Vermont Secretary of State (incorporation, limited partnership, limited liability company, and limited liability partnership filings, business name registration): Department of Taxes (tax information, downloadable forms): Vermont Department of Labor (workers' compensation, job health and safety requirements, state wage/hour regulations, unemployment taxes): Vermont Department of Labor (on-line reporting of new hires): Department of Economic Development (information and help with business startup): Legal Guide to Doing Business in Vermont (by a Vermont-based law firm -- information updated through January 1, 2004): Vermont Human Rights Commission (for information on Vermont anti-discrimination laws): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Vermont, or contact the following state agency: Vermont Economic Development Authority The address of the main SBA Office in Vermont is: U.S. Small Business Administration |
Copyright © 2007 Michael D. Jenkins
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